The pound edged up on expectations that the Bank of England will give a clear signal on Wednesday that interest rates are likely to rise before next year's general election.

Mark Carney, Governor of the Bank of England, is expected to endorse market expectations of a rate rise in the first quarter of 2015 - three months earlier than had been forecast in February - in the Bank's latest Inflation Report on Wednesday morning.

The pound was trading headed back towards $1.70, rising 0.3 of a cent at $1.6860. Trade-weighted sterling at its highest level since 2008.

The pound edged up against the dollar in early trading on Wednesday. Graph: Bloomberg

Kathleen Brooks, research director of UK EMEA at forex.com, expects Mr Carney to suggest that the Bank is in no hurry to raise interest rates but that market may well call his bluff.

Markets said the Bank got it wrong when it last year focused on a single 7pc unemployment rate threshold in its forward quidance on rates - unemployment is now at 6.9pc and could fall to 6.8pc on Wednesday and the Bank has abandoned that focus in favour of a wide range of indicators to assess how much spare capacity there is in the economy.

"Whether or not the market calls Carney’s bluff on the timing of rate rises could be dependent on a couple of things," Ms Brook said in note.

"If the BoE revises down its inflation forecast on the back of weak price pressure and strong sterling, it could be harder for the market to force Carney and co. to admit a rate rise is coming. However, if the Governor suggests that there is discord within the MPC about the timing of rate increases, then the market could interpret this as hawkish."

Mr Carney has previously said that the Bank would "absolutely" be prepared to raise rates before next May's election. Three other members of the Bank's Monetary Policy Committee have said that the Bank could be forced to raise rates sooner than expected if there is evidence that strong growth is also pushing up prices.

The Organisation for Economic Co-operation and Development said on Tuesday that Britain was settling into a period of "above-trend" growth, and the Bank could raise its growth forecasts for 2014 and 2015 from its current projections of 3.4pc and 2.7pc.

"Amid strong growth we expect Carney to admit a rate hike is coming in the first quarter of 2015," said Rob Wood, chief UK economist at Berenberg bank and a former Bank economist. "With the data so strong, we think there's a real chance that a rate hike could even come by the end of 2014."

Wednesday's Inflation Report is expected to show that consumer prices inflation will remain close to the Bank of England's 2pc target this year and next, enforcing the Bank's message that rate rises will be gradual, and will only begin once more economic slack has been absorbed.

Alan Clarke, head of fixed income at Scotiabank, said: “If you can’t hike with double digit house price inflation … and strong labour data, when can you?”

Chancellor George Osborne and Mr Carney believe eventual rate rises are a sign of economic success. In an interview last month, Mr Carney said rate rises should be viewed as a "welcome sign" that the economy is finally healing after the Great Recession.

Ms Brooks said: "The biggest upside risks to sterling [in the Inflation Report] could come from ... an upgrade to the GDP forecast and no decline in the inflation forecast and ... signs that the BOE is concerned that macro-prudential measures will not be enough to cool the UK’s housing market.

"On balance, we think this report could be mildly bullish for the pound, and if we do see a recovery in GBPUSD then key resistance levels to watch out for include: 1.7043 – the August 2009 high, and then 1.7332 - the 50% retracement of the November 2007–January 2009 bear trade."